Earthlink 2012 Annual Report Download - page 27

Table of Contents
We believe the primary competitive factors in the Internet access industry are price, speed, features, coverage area and quality of
service. While we believe our Internet access services compete favorably based on some of these factors when compared to some Internet access
providers, we are at a competitive disadvantage relative to some or all of these factors with respect to other of our competitors. Current and
potential competitors include many large companies that have substantially greater market presence and greater financial, technical, marketing
and other resources than we have. Our dial-
up Internet access services do not compete favorably with broadband services with respect to speed,
and dial-
up Internet access services no longer have a significant, if any, price advantage over certain broadband services. Most of the largest
providers of broadband services, such as cable and telecommunications companies, control their own networks and offer a wider variety of
services than we offer, including voice, data and video services. Their ability to bundle services and to offer broadband services at prices below
the price that we can profitably offer comparable services puts us at a competitive disadvantage. In addition, our only significant access to offer
broadband services over cable is through our agreement with Time Warner Cable and Bright House Networks.
Competition could adversely impact us in several ways, including: (i) the loss of customers and resulting revenue; (ii) the possibility of
customers shifting to less profitable services; (iii) the need to lower prices of our services; and (iv) the need to increase marketing expenses or
other operating costs to remain competitive. We experience pricing pressures for our consumer access services, particularly our consumer
broadband services, due to competition, volume-
based pricing and other factors. Many providers have reduced and may continue to reduce the
retail price of their Internet access services to maintain or increase their market share, which could cause us to reduce, or prevent us from raising,
our prices. We may encounter further market pressures to: migrate existing customers to lower-
priced service offerings; restructure service
offerings to offer more value; reduce prices; and respond to particular short-term, market-
specific situations, such as special introductory pricing
or new product or service offerings. Any of the above could adversely affect our revenues and profitability.
The continued decline of our consumer access subscribers, combined with the change in mix of our consumer access base from narrowband
to broadband, will adversely affect our results of operations.
During the year ended December 31, 2012, our average consumer access subscribers decreased from 1.5 million to 1.2 million. Our
consumer access subscriber base and revenues have been declining due to continued maturation of the market for Internet access and competitive
pressures in the industry. We expect our consumer access subscriber base and revenues to continue to decline, which will adversely affect our
profitability and results of operations. In addition, we have done, and expect to continue to do, targeted price increases, which could negatively
impact our churn rates. Our strategy for consumer access subscribers is to engage in limited sales and marketing efforts and focus instead on
retaining customers and adding customers that are more likely to produce an acceptable rate of return. If we do not maintain our relationships
with current customers or acquire new customers, our revenues will decline and our profitability will be adversely affected.
Changes in the mix of our consumer access subscriber base, from narrowband access to broadband access, have also negatively affected
our consumer access profitability. Our consumer broadband access services have lower gross margins due to the higher costs associated with
delivering broadband services. Our ability to provide these services profitably is dependent upon cost-
effectively purchasing wholesale
broadband access and managing the costs associated with delivering broadband services. While we continuously evaluate cost reduction
opportunities associated with the delivery of broadband access services, our overall profitability will be adversely affected if we are unable to
continue to manage and reduce costs associated with the delivery of broadband services. In addition, we will not be able to reduce costs
proportional to our revenue declines over time.
Potential regulation of Internet service providers could adversely affect our operations.
Narrowband
. Our Internet access services are not currently subject to substantial regulation by the FCC or state public utilities
commissions. Both Congress and the FCC are considering proposals that involve greater regulation of IP-
based service providers. Depending on
the content and scope of any regulations, the imposition of such regulations could have a material adverse effect on our business and the
profitability of our services. Currently, narrowband Internet access is classified as an “information service”
and is not subject to traditional
telecommunications services regulation, such as licensing or pricing regulation. Any change to these rules that would apply per-
minute carrier
access charges to dial-
up Internet access traffic could significantly impact our costs for this service. While Internet traffic is not subject to the
FCC's carrier access charge regime, intercarrier compensation for dial-
up ISP bound traffic is regulated by the FCC. The FCC has established a
uniform, nationwide rate for ISP-bound traffic.
Broadband . Broadband Internet access is also currently classified as an “information service.”
While current policy exempts broadband
access services from the Universal Service Fund ("USF"), the Congress and FCC may consider expanding the USF to include broadband Internet
access services. This change could allow broadband service providers to receive a subsidy for deploying broadband in rural and underserved
areas, but it will most likely require broadband service providers to contribute to the fund as well. If broadband Internet access providers become
subject to USF contribution obligations, they would likely
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